Technical Analysis Mode (7) Playing the Gap

Technical analysis mode (six) to play the gap

In volatile markets, traders can benefit from sharp increases in asset prices if they can be turned into opportunities.A gap is an area on a chart where the price of a stock (or other financial instrument) rises or falls sharply, with little trade in between.Therefore, the chart of the asset shows a gap in the normal price pattern.Enterprising traders can explain and exploit these gaps to profit.This article will help you understand how and why gaps occur, and how to use them to make profitable trades.

Key Points

• A gap is a space on a chart that occurs when the price of a financial instrument changes significantly with little trade in between.
• Unexpected gaps can occur when the perceived value of an investment changes due to underlying fundamental or technical factors.
• Gaps are classified as breakout, exhaustion, common or persistent based on how long they appear in a price pattern and the signal they send.

Gap Basics

Gap will occur due to underlying fundamental or technical factors.For example, if a company's earnings are much higher than expected, the company's stock may gap the next day.That means the stock opened higher than the previous day's close, leaving a gap.In the foreign exchange market, it is not uncommon for a report to generate so much buzz that the bid-ask spread widens to the point where a significant gap can be seen.Likewise, stocks that made new highs on the day could open higher the next, thus gapping for technical reasons.

Gap can be divided into four categories:

• Breakout Gap Appears at the end of a price pattern and marks the start of a new trend.
• Exhaustion Gap Occurs near the end of a price pattern, signaling an eventual attempt to make a new high or low.
• Common gaps cannot be placed in price patterns - they simply represent areas where prices have gapped.
• Persistent gaps, also known as runaway gaps, occur in the middle of a price pattern and indicate an influx of buyers or sellers with a shared belief in the future direction of the underlying stock.